Iraq fallout may end multilateral trade deals

by Colin Teese

News Weekly, May 17, 2003

Some time after the middle of last year President Bush made a statement which made hardly more than a ripple on the sea of the Australian press. Never again, he promised - and he was addressing himself as much to the rest of the world as to Americans - would any country be allowed to challenge the economic, political or military power of the United States.

Subsequent events have proved to us the President wasn't joking.

Actually, events in relation to Iraq would suggest that the Bush administration has gone further than the President foreshadowed.

United States foreign policy under George W. Bush seems to have undergone a fundamental shift. The post war consensus between the victorious allies in World War II appears to have been abandoned. We have seen international cooperation in response to world crises brushed aside in favour of superpower unilateralism.

New unilateralism

This new unilateralism presents a real and serious threat to the Western Alliance. That Alliance, comprising the North American powers - led by the United States - together with a group of European powers - including the European Union, and sometimes Japan, has been of enormous value to the security of the world since the end of World War II. The co-operation embodied in it shielded Western Europe against threats from the Soviet empire. No less important, it helped fashion the miracle of interventionist capitalism and the reliable, sustained and widespread prosperity which led ultimately to the collapse of communism.

Now all of that is at risk, including NATO, which provided the military coordination for the work of the Alliance.

There can be no doubt that, at the political level, the fall out from these changes for the future of international relations generally, requires the most careful analysis. That, however, is outside the scope of this paper.

My concern is for the impact of these developments on international economic and financial life. Since World War II the management of international trade, economic and financial relationships has been governed by three agencies - all under the auspices of the United Nations.

Given the fact that the US now seems willing to operate outside the rules of the UN, how then are we to regard the future of the economic agencies which flow from it - namely, the International Monetary Fund, the World Bank and the World Trade Organisation?

Some may insist that these agencies - whatever their formal connections with the United Nations - are nevertheless 'safe'. Whatever may have been the disagreements over Iraq and the Security Council of the United Nations, between the parties to the 'Alliance', the economic agencies are different. There is a common interest on all sides in ensuring they continue 'business as usual'.

Perhaps. But it is not possible to skate over the fact that recent events have opened a fault line in the Western Alliance. And, for nearly sixty years, it has been this Alliance which has underwritten the doctrine of international cooperation.

The plain fact is that the US and Europe now see the world's strategic problems in fundamentally different ways. And it would be naïve to imagine that so fundamental a disagreement can be quarantined within a single element of international relations. Mr Bush's statements certainly do not support that view.

It is not possible to predict precisely how the future will evolve. But surely it is possible to assume that much will no longer be the same - how much we cannot yet know.

Casualties?

Ironically, the full implications of what is likely to happen appear not be well understood by those around the President. Quite possibly, one of the first and principal casualties of US unilateralism could be globalisation.

Whether we like globalisation or not, we must surely recognise that by its very nature the concept requires the integration of the world's economies. And that integration rests upon a close level of trans-Atlantic cooperation - political and economic. The question therefore is: can globalisation survive the fracture of the western Alliance?

Quite likely not. Global economic integration and co-operation relies for its success upon some prescribed and consistently applied understandings with regard to the way nations conduct their economic relations with each other. How can this be done except in the context of internationally agreed and universally applicable rules?

Those rules, effectively, provides a 'rule of law' for the conduct of international economic relations. And, if recent events are any indication, that is precisely what the US appears to have turned its back on.

The President revealed to us a year ago his intention; his actions so far suggest we should take him seriously.

Neither should we conclude that his intentions are limited to political or security considerations.

Indeed, it is hardly possible for any such limitation to apply.

Besides, there is evidence from our own experience to suggest otherwise. On the trade issue, the US is turning the focus of its intention away from the World Trade Organisation and the WTO's emphasis on multilateral outcomes. Australia is not the only example of this development.

After the weekend beginning May 4, the media has been full of reports of our Prime Minister's time in Texas with US President.

Obviously the President was delighted to welcome one of his strongest supporters on Iraq. And clearly he wanted to emphasise that close ties between the two countries would in future be drawn still closer.

He chose to highlight the negotiations for a free trade agreement and the possibilities this would open up.

Firm attachment

In response to this, one journalist was bold enough to suggest that the new agreement would attach the Australian economy firmly to that of the US. That is unlikely. But it is possible that ours may become a closer economic relationship with the US than that already enjoyed by bordering Canada.

However, the more the President talked the more it was possible to feel anxious about the future of closer trade ties with the US.

Even before he got to specifics, Mr Bush felt it necessary to put down an escape route. Whatever was negotiated in any new agreement he hoped Congress would endorse. In other words it wasn't his gift to promise.

Wheat exports to Iraq were also canvassed according to some reports. Informal reports on outcomes of these talks were less explicit. But the President is reported to have told Mr Howard that the US would not use its subsidies to undercut Australian wheat exports to Iraq. Implied, apparently, was that there would be a 'quid pro quo' - we give up our single selling desk for wheat.

Once the qualifications kick in, all of a sudden the deal does not sound nearly so good.

But consider where we are on wheat in Iraq. We have had much of the market cornered since the early nineties. Largely because Saddam Hussein had blackballed the US.

What the President has now apparently offered our Prime Minister - in the context of a free trade agreement - is some kind of undertaking that the US will not compete using subsidised US wheat against us in the Iraqi market.

Fine, but how could any such deal work? Assuming the US was willing, how could it detach its general wheat subsidies from just that wheat exported to Iraq? Would certain US farmers, who provide wheat for the Iraqi market, be denied subsidy for that wheat? It's hardly likely that the US industry would go along with that - neither would the US Congress. And what about other suppliers to the Iraqi market? Are they to be denied the same concession as Australia? If so, what about the WTO?

Even if the President is prepared to deny completely its obligations in the WTO it is unlikely for other reasons that the President could deliver on his promise.

We should never forget that US farmers are just as much hooked on subsidies as are those of the European Union. In all sectors. I don't have recent figures for wheat, but back in 1998 the US exported 307 million bushels at US$1 billion less than the cost of production.

Another example from more recent times is cotton.

In 2001 the US spent US$4 billion subsidising the income of 25,000 growers ($US160,000 each on my calculations) in California, Texas and elsewhere. According to the International Cotton Advisory Committee these subsidies lowered world prices by 25%. No wonder our cotton industry is suffering, never mind those of developing countries.

And joining free trade agreements with the US doesn't seem to help. Mexico has one under which it has had to reduce its tariffs on maize as part of its obligations. As a result its local maize growing industry is being destroyed by US maize imports driven by a subsidy of US$8 billion each year.

No prospect

On any reasonable reading of the situation the prospect of removing these subsidies is practically zero.

Maintaining them no doubt causes the US embarrassment internationally. Against that, the domestic political cost of removing them is unsustainable.

Perhaps these domestic pressures will encourage still further what seems to be the President's present inclination to turn his back on international cooperation in favour of bilateral deals.

This won't worry the big players in Europe. They have their own subsidy programs to protect. And, as for bilateral deals, they are powerful enough to get as much as they give in deals with the US.

But there are real problems for Australia.

Fortunately, the Prime Minister is realist enough not to pin much hope of gains for us from a free trade agreement with the US. He knows the US farm subsidies are here to stay.

But is recognising reality enough? Political reality is driving the subsidy programs in Europe and North America. What we must have is a realistic response to it. We must recognise farm subsidies as a clear example of market failure and adjust our policies accordingly.

A good start would be to acknowledge that phony competition policies are not the answer unless we want our farm industries to follow those of the Mexicans into oblivion.